A Taxing Debate

Tax

The gloves came off yesterday on Parliament’s first day back after its summer break, with Stephen Harper dealing the NDP what he evidently considers a fatal insult. According to the synchronized taunts of the Prime Minister and his Conservative minions, Her Majesty’s Loyal Opposition wants nothing more than to impose upon our struggling economy — brace yourselves, gentle Canadians — a carbon tax!

Boo?

Thomas Mulcair and his New Democrats played their part flawlessly in Harper’s script by denying the government’s charge, pointing out they actually prefer another form of carbon pricing known as cap-and-trade. But, according to the impeccable logic of a Conservative Party “fact check,” “A ‘price on carbon’ is a tax on carbon. That makes it a carbon tax.” Never mind the commonly reported inconvenience that as recently as 2008, the Conservatives too favoured a cap-and-trade system.

So what exactly is the difference, if any, between these two carbon pricing mechanisms? They both seek to limit carbon dioxide emissions, and they both require emitters to pay for the privilege of emitting. The difference is in the order. With a carbon tax, government starts by setting a price, and in response to this economic incentive, polluters reduce their emissions. By contrast, under cap-and-trade, government starts by setting a cap, a maximum level of aggregate emissions, but polluters are free to buy and sell their emission permits amongst themselves for whatever price the market demands.

Both systems have their advantages. Cap-and-trade has the benefit of certainty. After all, the goal of all climate policy is to reduce carbon emissions — something which cap-and-trade does directly by dictating what the overall level of emissions must be, thereby eliminating the guesswork involved in setting a carbon tax. However, carbon taxes have the strength of being generally more broad-based than cap-and-trade. For logistical reasons, it is difficult to set up a cap-and-trade system among any but the largest of large polluters, meaning that most emissions will probably not be covered. By contrast, there is nothing easier than levying a tax. Carbon taxes therefore have at least the potential of applying to 100 percent of emissions.

In my opinion, the advantages of carbon taxation are stronger than those of cap-and-trade, but the devil is in the details. I would take a well-designed cap-and-trade system any day over a poorly designed carbon tax. The effectiveness of each policy depends on how high the tax is set, or how low the cap.

Falling right into Harper’s trap yesterday, Mulcair claimed he preferred cap-and-trade because carbon taxes are “regressive.” This is a common myth. The truth is that all measures to combat climate change — whether they take the form of a tax, emissions trading, or traditional command-and-control regulation — result in higher energy prices at the retail level. No matter who pays directly, businesses will always pass on as much of the cost to consumers as they can possibly get away with. The solution does not lie in making false promises that only “big polluters” will have to pay and no one else. Rather, it lies in offering tax credits or other forms of compensation to people with low and moderate incomes. I have written in the past about progressive carbon tax proposals which use the revenue generated to ensure that the poor are better off than they would be in the absence of such a tax. It is no less incumbent upon cap-and-trade advocates to design their plans in such a way that the burdens are distributed justly.

In conclusion, despite the similarities, cap-and-trade is not a carbon tax, and the Conservatives are wrong in their boastful chorus of accusations. Nevertheless, New Democrats are advised to grow a pair and not let Harper define the debate. We all need to recognize that a well-designed, progressive carbon tax could do the planet a hell of a lot of good.

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An Open Letter to Stephen Harper Regarding Senate Reform

Senate Foyer Ceiling

Dear Prime Minister Stephen Harper:

I am writing today in response to reports that you will seek a Supreme Court reference on the constitutionality of your proposals for Senate reform. In a way, I can understand this. You would like clarity on a politically tricky issue, one that would otherwise almost inevitably face judicial challenge.

Personally, I do not believe the court will fully endorse all features of your plan, as the Constitution Act, 1982 is quite clear regarding the constitutional amendment requirements for such fundamental changes to the upper house. But either way, both you and I know that pursuing Senate reform by statute is not a long-term solution. Any future government will be able to repeal your legislation without difficulty.

What Canada really needs, to settle the decades-long debate once and for all, is a national referendum. Not one in which the issue of Senate reform is muddied by other matters, as in the Charlottetown Accord, but a single stand-alone nationwide vote on the future of the Red Chamber. Voters should be given a choice between three possibilities: 1) an appointed Senate, 2) an elected Senate, and — my personal favourite (see here and here for my reasoning) — 3) abolition of the Senate. The ballot would also need to be preferential to make sure the winner has majority support.

Once the dust from the referendum has settled and one of these three options has become legitimized by popular endorsement, it should then become easier to get seven provincial governments representing half the country’s population (as required by the Constitution Act, 1982) to, if necessary, back a constitutional amendment. Will the provinces inevitably put aside their differences and come to an agreement after such an exercise? There is no guarantee. But this at least represents a better shot at a permanent resolution to the Senate reform debate than your Supreme Court reference case.

And what if voters settle on something other than your preferred route of an elected Senate? Am I being naive in asking you to put your own preferred outcome at risk? Only you can answer that question, Mr. Harper. All I can do is urge you to recognize that what unites all proposals for Senate reform is the desire to deepen democracy in our country. So please, respect the people — theĀ demos — in their right to decide for themselves what institutions are most appropriate for the expression of their will. This is the only way of dealing with the Senate that truly embraces democracy.

Sincerely,

David Taub Bancroft

The Folly of Balanced Budget Laws in BC

The news is out. Due to declining natural gas prices, the BC Liberal government is projecting a budget deficit of $1.14 billion this year — $173 million more than expected. And while the government still insists that it plans on finding enough savings to balance next year’s (election year) budget, I think it’s a safe bet to predict it will fail in that endeavour too. A 2013 deficit means it will have to amend its own balanced budget law for the third time since 2009 — a pattern we have grown achingly familiar with here in British Columbia.

A little history. In 1991, BC’s Social Credit government introduced the province’s — and the country’s — first balanced budget legislation. Later that year, there was an election, and the victorious NDP repealed the law. The government ran deficits for several years. During their second term, however, the New Democrats decided to take a stab at fiscal responsibility and passed a balanced budget law of their own that set a 2004 deadline for ending deficits. To everyone’s surprise (largely due to greater-than-expected energy exports), the NDP passed a pair of surplus budgets well ahead of schedule by the end of its stint in government.

Shortly thereafter, in 2001, the New Democrats suffered a crushing defeat at the polls courtesy of the Liberal Party — elected on a platform of massive tax cuts. The Liberals repealed the NDP’s balanced budget law so as not to impede the fulfillment of their election promises, and managed to turn a record-breaking surplus into a series of record-breaking deficits. In place of the previous legislation, they passed their own law requiring a return to balanced budgets by 2004 — the same deadline originally put in place by the NDP.

The Liberals met their deadline and chugged along happily in the black for several years, until the financial crisis hit. In 2009, they realized that they could not realistically deliver a balanced budget in the midst of the worst global recession since the 1930s, so they amended their own legislation to allow themselves two years of deficit spending. Later that year (after an election), they amended the law yet again to increase their deficit window by an additional two years.

And that more or less brings us up to the present, with the Liberals’ self-imposed four-year window closing fast.

Any observer of BC politics in full possession of the faculty of memory will rightly ask: what is the point of laws requiring governments to balance their budgets if they simply repeal or amend them whenever convenient? How is this any different from traditional fiscal policy without such laws?

Perhaps we must recognize that there is no shortcut to fiscal enlightenment. At their best, balanced budget laws showcase the self-serving hypocrisy of politicians from across the spectrum. At their worst, they can jeopardize vital social programs and transform recessions into depressions. Governments need the flexibility to occasionally run deficits. Making them jump through legislative hoops to do so serves no purpose.

It is up to us, the electorate, to define the confines of this fiscal flexibility. Not by demanding that overly simplistic and easily circumvented rules be drafted, but by educating ourselves on the context dependence of fiscal and economic policy — i.e. when it is and is not appropriate to run deficits — and voting accordingly. There is no easy way of going about it. With fiscal policy, as with everything else, we are responsible for holding our leaders accountable.

So if, as I suspect, the Liberal government fails to balance its budget on target next year, let us pray that it mercifully, once and for all, puts a bullet in BC’s distracting two-decade experiment with balanced budget legislation.

Quebection Projection

Apparently I haven’t learned my lesson since predicting a Peggy Nash victory in this year’s NDP leadership race. I may not have the statistical wherewithal or ear-to-the-ground perspicacity of an Eric Grenier, but I cannot resist the peculiar temptation — that siren song that has marked the downfall of politicos far greater than I — of making a forecast. Without further ado, here is what I think will happen in tomorrow’s provincial election in Quebec:

The Parti Quebecois will win a minority government. A relatively large minority — perhaps close enough to majority territory that Quebec solidaire’s two or so seats could help them fashion a workable coalition.

The Liberals, meanwhile, will make Official Opposition. Notwithstanding their second-place finish in seats, however, they will be relegated to third place in the popular vote at the hands of the upstart Coalition Avenir Quebec. Furthermore, Premier Charest will fail to carry his own riding.

Finally, Option nationale and my beloved Greens (despite my inexplicably unheeded endorsement) will win zero seats each. Or between them, I suppose.

Prove me wrong, Quebec. I dare you.

Update 4/9/2012: Quebec has proven me wrong. But only a little. By my count, I made eight predictions in the above post, two of which turned out wrong. Could have been much worse. Loyal readers of this blog are encouraged to identify and list all eight of my predictions in the comments section below. All who do so correctly will be rewarded with a limerick composed by yours truly.